ISTAR INC.
Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) and unsecured debt rating of
The Rating Outlook is Positive.
Key Rating Drivers
SAFE's rating reflects its focus on the relatively low-risk ground lease asset class, which is characterized by growing, long-dated revenue streams and significant overcollateralization, strong asset quality performance, low leverage, long duration funding, and solid dividend coverage.
The maintenance of the Positive Outlook reflects the progress made with regard to portfolio diversification and funding profile, as evidenced by an up-tick in unsecured debt to 62.4% of total debt as of
Rating constraints include SAFE's relatively short standalone operating history, limited history of capital markets access, modest profitability and distribution requirements as a real estate investment trust (REIT), which limits the ability to retain capital.
Fitch views asset quality as an important rating factor due to significant overcollateralization provided by the ground leases. SAFE's asset quality performance remains stable despite a more challenging economic backdrop in the commercial real estate sector and continued to collect 100% of amounts due under its ground leases through 3Q23.
Under Fitch's Non-Bank Financial Institutions Criteria, the core metric for a balance sheet intensive finance and leasing company's asset quality is the core impaired and nonperforming loan ratio. This ratio is not relevant for SAFE as the company does not make loans. Thus, for the purpose of assessing SAFE's asset quality, Fitch considers the rent coverage ratio, as measured by property net operating income to annualized cash, rent due to SAFE. In Fitch's view, this metric can be an indicator of potential deterioration in portfolio asset quality.
As of 3Q23, the weighted average rent coverage ratio was 3.7x; consistent with the four-year average (2019-2022), which Fitch views as solid. Fitch also considers the weighted average ratio of SAFE's investments in ground leases to the portfolio's total value (GLTV) when assessing asset quality. GLTV was 42% at 3Q23 compared with a four-year average of 40%, which Fitch believes is solid and provides ample cushion to valuation declines in the asset.
Portfolio diversification by asset class and geography are improving, although SAFE continues to have some concentrated exposure to office (43% of the portfolio at 3Q23) and
SAFE's reported pre-tax return on average assets was negative 0.3% for the trailing 12 months (TTM) ended 3Q23 and averaged 2.2% between 2019 and 2022, which is within Fitch's 'bb' category benchmark range of 1.0%-4.0% for balance sheet-intensive finance and leasing companies with an operating environment score of 'bbb'. The loss in 2023 resulted from a
SAFE's gross debt to tangible equity ratio was about 1.9x as of 3Q23, not including the pro rata portion of the joint venture debt, and is in line with its stated leverage target (debt-to-equity) of 2.0x or below. While SAFE's target leverage ratio compares favorably to finance and leasing company peers and the asset quality of the portfolio, balance sheet growth will be constrained without follow-on equity offerings as leverage is at the upper end of the target level. Incremental equity issuance will be highly dependent on the firm's share price relative to book value. SAFE's most recent public equity issuance was for
SAFE has materially shifted its debt funding mix over the last two years, going to 62.4% unsecured debt to total debt from a fully secured profile at YE20. The firm has not issued incremental secured funding since 2020. Fitch views this mix shift and SAFE's funding duration, which was 22.5 years at 3Q23, favorably although funding duration has declined modestly from 25 years at 3Q21.
As an Umbrella Partnership REIT, SAFE is required to distribute at least 90% of its annual net taxable income to shareholders, although its taxable income has been relatively low historically given required tax adjustments. On a cash earnings basis, SAFE's coverage of dividend distributions declined given the impact of the merger and the rapid increase in short-term interest rates. Coverage is expected to normalize in 2024 and historical coverage of dividends has been near 100%. Failure to fully cover dividends with cash earnings on a sustained basis could result in negative rating action.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A sustained decrease in unsecured debt as a proportion of total debt below 60%;
An inability to execute on strategic objectives and falling materially short on management projections;
Alteration in the risk profile of the portfolio, including expansion into products outside of ground leases;
Meaningful deterioration in asset quality metrics, including ground lease defaults or rent deferrals or a material, sustained reduction in the rent coverage ratio to below 2.5x;
A sustained increase in leverage above the targeted range of 2.0x;
Impairment of the liquidity profile.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Continued diversification of the portfolio by property type, geography, tenant and leasehold lenders while remaining within core competencies;
Maintenance in the proportion of unsecured debt funding above 60%;
Maintenance of leverage within the firm's targeted range;
A return to full coverage of the dividend on a cash earnings basis;
Effective navigation of current market headwinds, related to both overall economic conditions and potential structural shifts in demand for office properties;
Stability of management and further execution of both growth and financial strategies.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The unsecured debt rating is equalized with Safehold's and
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The unsecured debt rating is primarily linked to changes in the Long-Term IDR and would likely move in tandem with it. However, a sustained decline in the level of unencumbered assets that weakens the recovery prospects on the unsecured debt could result in the unsecured debt ratings being notched down from the IDR.
SUBSIDIARY AND AFFILIATE RATINGS: RATING SENSITIVITIES
The ratings of
ADJUSTMENTS
The Business Profile score has been assigned above the implied score due to the following adjustment reasons: Business model (positive), Historical and future developments (positive).
The Capitalization and Leverage score has been assigned above the implied score due to the following adjustment reason: Risk profile and business model (positive).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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